Expect Coal India to maintain its earnings growth trajectory: IIFL

RESEARCH: IIFL
RATING: BUY
CMP: Rs 313

CIL’s Q2FY11 was adversely affected by high wage costs in a seasonally weak quarter. H1 production growth has been muted, at 0.7% Y-o-Y, but growth is picking up - production was up 4.3% Y-o-Y in the first two months of Q3. IIFL expects the company to maintain its earnings growth trajectory, aided by: 1) higher blended realisations due to increased proportion of e-auction sales and ongoing negotiations; and 2) trending down of employee costs in H2.

Any weakness in the stock due to the underwhelming Q2 presents an opportunity to buy the secular coal shortage theme. H1 contribution margin expanded 400 bps Y-o-Y as against our estimate of a marginal decline. But H1 employee costs were much higher than our full year estimates. The 10% Q-o-Q increase in wage costs was driven by leave encashment and bonus-related payments. Hence, employee costs are to trend down in H2.